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Will Google Walk the Walk in China?

The search giant's departure could have a bigger effect on China than we think.

Ridiculous amounts of ink have already been spilled discussing Google's (NASDAQ:GOOG) threat to leave China. It's the business equivalent of a fight between Brad Pitt and Angelina Jolie, and it'll be covered accordingly. But there's far more at stake here than the market-share wars of Google and local rival Baidu(NASDAQ:BIDU).

I've just finished reading Paul Midler's Poorly Made in China, one of The Economist's best books of 2009. The author is a business consultant in China, and for years, he tried to smooth out the relationship between Chinese manufacturers and the Western companies that import their goods to home markets. The book describes the shocking tactics that Chinese factory managers use to steal profits from their Western "partners." In short, the factories – which make everything from cosmetics to metal goods – repeatedly sacrifice long-term relationships for the sake of a quick gain. Western firms enable this sort of behavior by their refusal to walk away from China. The lure of the Chinese market outshines the pain and frustration of dealing with underhanded factory managers.

While they operate in a different sphere than the manufacturing world described in Midler's book, American technology companies have run into the same problems while doing business in China. As noted here, Yahoo!(NASDAQ:YHOO), eBay(NASDAQ:EBAY), and Amazon.com(NASDAQ:AMZN) have quietly scaled down in China because of their difficulties with bureaucracy. But none of these companies carry the same weight that Google does, and none have made their troubles as public. As a result, Google has the chance to set a precedent.

China has repeatedly called Western business's bluff. If Google walks from China, it would be taking a principled stance – something that its peers and counterparts in manufacturing did not attempt. Doing so would hurt Google's future profits, but it might embolden others to take a similar stance, threatening Chinese growth and providing Western firms with leverage in negotiations. If leaving China would help bring transparency and accountability to that country's business culture, it may be the best move for all of us.